Old Age and Survivor's Insurance

Under an annuity plan established by certain school districts, an
employee of such a district can voluntarily agree to enter into a salary
reduction agreement and to have the district deduct a portion of his cash
pay and use this portion to pay an insurance carrier for an annuity for
that employee. Held, the amounts deducted and paid to the carrier by the
employer under the annuity plan are not employer contributions under the
Social Security Act and hence are not excluded from "wages" for social
security purposes under sections 209(b), (c), or (e) of the Act.

By resolution of their boards of education certain school districts in
the State of Y offered their employees an annuity plan to supplement the
retirement system already in effect. The work of employees of the school
districts is employment covered under the Social Security Act (hereinafter
referred to as the Act), under an agreement entered into by State Y with
the Secretary of Health, Education, and Welfare in accordance with section
218 (providing for voluntary coverage of State and local government
employees).

Under the plan, the school district enters into an agreement with each of
its employees, who so desires, to deduct from that employee's cash pay a
specified amount and to pay this amount to an insurance carrier to provide
an annuity for the employee. Pursuant to such an agreement the board of
education reduces the employee's annual cash compensation for the
beginning year and for each subsequent year by the amount he designates.
He is not permitted to revise the amount authorized for the annuity
purchase during the school contract year. If he decides to terminate the
agreement, he must give written notice of termination to the
superintendent of the school district. His cash remuneration then reverts
to the original sum. The employee does not, because of termination of
employment, expiration of a contract of employment, or termination of his
agreement, forfeit his right to the annuity already purchased for him. The
statutes of State Y pertaining to school affairs permit the amount of
compensation or wages payable to an employee and the medium of payment to
be a matter of contract between the school board and the employee.

A question has been raised as to whether the amounts deducted from the
employee's pay and paid to the insurance carrier are creditable as wages
for purposes of the Act. If they are not wages, this could (among other
consequences) tend to reduce the employee's average creditable earnings
and thus reduce the amount of any social security benefit which may later
be payable on his earnings record.

The term "wages" is defined in section 209 of the Act as remuneration for
employment, and includes all such remuneration except for specified types
of payments which are expressly excluded. The provisions of the Act
excluding from wages retirement pay, or payments toward the purchase of
employee annuities, are contained in sections 209(b), (c), and (e) of the
Act (and in the corresponding section 3121(a)(2)(3), and (5) of the
Internal Revenue Code). The language of the statute together with the
expressions of congressional intent contained in H.R. Rep. No. 728, 76th
Cong., 1st Sess. 18 (1939) and S.Rep. No. 1669, 81st Cong. 2d Sess. 82
(1950), indicate clearly that these exclusions are intended to apply only
to such payments made by the employer in his own behalf and from his own
funds and thus do not exclude payments made by him if acting as a conduit
for funds of his employees.

The facts in the present case establish that for social security purposes
it is the employee's own funds which are being used to purchase the
annuity and, in effect, constitute a deduction from his salary. Action by
the participating employee in authorizing reduction of current wage
payments is a voluntary one in respect of the compensation otherwise
payable. The payments made through the employer to the insurance carrier,
therefore, do not come within the provisions of sections 209(b), (c), or
(e) of the Social Security Act. The annuity purchase amounts are,
therefore, held not to be excludable from "wages" for social security
purposes. Whether they meet the requirements for income tax deferment
under section 403(b) of the Internal Revenue Code of 1954 is a matter
within the jurisdiction of the Internal Revenue Service. The decision
under that provision of law for the purposes of income tax liability is
not relevant to a decision under the social security provisions of law.

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